What Is A Private Company Limited By Shares?
In this guide we’ll explain the benefits of running a business as a private company limited by shares – including how this protects directors if it becomes insolvent.
There are more than 5m limited companies registered in the UK, with over 500,000 new ones incorporated each year, according to Companies House. Most of these are companies limited by shares.
Later in this article we’ll outline how to set one up and run through the limited liability implications for company directors.
But before we go any further, let’s start by taking a look at the meaning of a company limited by shares.
What is a private company limited by shares?
A private company limited by shares is one of the four main business types in the UK. The list includes:
- Public limited company (PLC)
- Private company limited by shares (LTD)
- Company limited by guarantee (CLG)
- Unlimited company
PLCs are often listed companies on stock exchanges, there are relatively few and unlimited companies are also low in number. CLGs – often charities or professional associations – only represent 2.5% of UK corporate bodies according to government statistics from 2019.
But private limited companies represented 93% of businesses (i.e. most companies) on the UK register in 2019 – unlike a PLC, these do not trade their shares publicly. So, who owns shares in a LTD company?
Usually its founders, members, staff, their family members, debenture holders and so on have the shares.
Forming a limited company
Here is an approximate example of the process for setting up a company limited by shares in the UK. This is a simplified overview – we recommend seeking professional advice for a comprehensive understanding of the process and its implications.
First and foremost, make sure a limited company is the most suitable structure for your business. Consider factors such as liability, but also growth potential and regulatory requirements.
- Choose a unique name: Run an availability check on the Companies House website to ensure no-one else has already registered your chosen name.
- Appoint directors and shareholders: Your company needs at least one director and at least one shareholder – but they can be the same person. Clearly define their roles and responsibilities.
- Prepare essential documents: These include the Memorandum of Association as well as the company’s Articles of Association.
- Register with Companies House: Submit your chosen name, registered office address, Standard Industrial Classification (SIC) code and incorporation application fee to Companies House for registration.
Also – apply for a National Insurance number for the company, open a business bank account and register for taxes (e.g. corporation tax).
Make a plan to comply with ongoing legal and administrative obligations, such as filing annual accounts and confirmation statements with Companies House.
Limited by shares – insolvency and liability for directors
Private companies limited by shares offer some protection for directors should the business enter insolvency.
Using this structure, a private company limited by shares is a separate legal entity compared to its personnel.
Under the terms of limited liability, if the company cannot pay its debts, directors are not held personally responsible – but there are some exceptions, which we’ll come to shortly.
Aside from these exceptions, if companies limited by shares enter into insolvency, the limit to directors’ personal liability is their share capital. Previously we’ve also written about what happens during insolvency with preference shares and ordinary stock.
An insolvency practitioner tries to rescue businesses unable to pay their debts on time – for example, by using a company voluntary arrangement (CVA).
If a rescue is not possible, the business may go through company liquidation, with assets turned to cash and distributed to creditors. But as mentioned, aside from the exceptions, limited liability protects company directors from having to personally repay company debts.
In contrast, sole traders who don’t work for a private limited company do not have this same layer of protection. Their work does not count as a separate legal entity automatically, so liability for business debts lies with them.
Exceptions for limited financial liability can include, but are not limited to:
- Company director misconduct or misfeasance, violating limited liability protection
- Signed personal guarantees making debt repayment legally binding
- Overdrawn director loan accounts (unless legitimately written off)
For example, a worst-case scenario for your overdrawn director’s loan account would involve the company going into liquidation, but you can’t pay back the debt.
You may need to take out a personal loan or liquidate other assets. In these circumstances, seek professional guidance from experienced insolvency practitioners as soon as possible.
Summary: Private company limited by shares
LTD companies do not trade their shares publicly. Usually its founders, members, staff, their family members and so on will own the shares.
Aside from some important exceptions, under the terms of limited liability, if a company limited by shares cannot pay its debts, directors are not held personally responsible.
We hope this guide has given you a useful understanding of how a private company limited by shares works, plus the implications for directors during insolvency procedures.
For more advice, take a look at our blog. Recently we’ve covered what antecedent transactions are and what a restructuring plan is.
For any queries or to discuss how our licensed insolvency practitioners can support your business, please contact us.
